MENA Insurance Pulse 2017

An Annual Market Survey

Lead sponsor Prepared by Lead sponsor

Contributing sponsors

MENA Insurance Pulse 2017

For more information about the report, please contact: Dr. Schanz, Alms & Company Dufourstr. 24 CH-8008 Zurich Switzerland Telephone: +41 44 256 10 80 [email protected] www.schanz-alms.com

To download a copy of the report, please visit: www.pulse.schanz-alms.com

© 2017 Dr. Schanz, Alms & Company

All rights reserved. No part of this publication may be reproduced, republished, uploaded, posted, framed, modified, sold, transmitted or otherwise distributed in any way, without the prior written permission of the publisher. Contents

Foreword 4

Foreword Qatar Financial Centre 5

Methodology 7

Summary of Key Findings 9

Key Pulse Readings 11

Market Overview 13

Survey Results 29 1. The overall perspective: Strengths, weaknesses, 29 opportunities and threats of MENA insurance markets 2. General insurance market status and outlook 37 3. Lines of business-specific prospects 47 4. Key market trends and drivers 53

From our partners

Insurance matters to Qatar’s economic development and transformation 20 The irresistible rise of InsurTech in the Middle East 22 Global energy outlook and its implications for the MENA region 24 Peak Re’s position in the MENA region and its opportunities going forward 26 Foreword

We are pleased to present the 5th edition of MENA Insurance Pulse. This annual research initiative is aimed at offering an authoritative overview of the current state and future prospects of the region’s US$ 54 billion primary insurance markets. It paints a comprehensive and quantitative picture of the current market sentiment, tracked over time.

Our regular readers and interviewees will notice that we have renamed the former MENA Insurance Barometer to MENA Insurance Pulse. For the first time, we no longer publish this research on behalf of a single sponsor but as a Dr. Schanz, Alms & Company report, drawing on the support of altogether six sponsors led by the Qatar Financial Centre. The renaming to MENA Insurance Pulse is meant to reflect this change. However, the publication’s remit, methodology and quality benchmarks will remain unchanged. The online version can be found on www.pulse.schanz-alms.com.

Through the MENA Insurance Pulse, the contributing sponsors demonstrate their commitment to improving the transparency of the regional market place. In addition, their support ensures the continued availability of an important benchmark for strategic and operational decision-making.

The 2017 edition draws on in-depth interviews with senior executives of 40 regional and international insurance and reinsurance companies, intermediaries and trade associations operating in the Middle East and North Africa. We believe that the key methodological strengths of the MENA Insurance Pulse lie in its comprehensiveness, diversity and diligence. Our qualitative interview approach enables us to probe deeper, obtaining clarifying responses from the participating executives. In addition, by including both global and regional players, as well as generalists and specialists, we have been able to collate a broad yet nuanced picture of the market place.

We would like to extend our deepest thanks to all sponsors and interviewees who have supported this research project, which is designed to benefit the MENA insurance market as a whole.

We hope that you will enjoy reading the 2017 edition of MENA Insurance Pulse and benefit from its findings.

Dr. Kai-Uwe Schanz Henner Alms Chairman and Partner, Partner, Dr. Schanz, Alms & Company Dr. Schanz, Alms & Company

4 Foreword Qatar Financial Centre

It is with great pleasure that the Qatar Financial Centre (QFC) co-presents to you the 5th edition of the annual MENA Insurance Pulse. We are proud to have served as the lead sponsor of this year’s research report, in continuation of our previous role as the sole sponsor.

Through the Pulse, the QFC demonstrates its commitment to the insurance industry, which accounts for an increasing share of the region’s economy. This is particularly true of Qatar where insurers are set to play a key role in accompanying the transition to a knowledge-based and diversified economy as well as the creation of deeper and broader domestic capital markets.

Our support of the Pulse is a natural extension of our continued hosting of Multaqa Qatar, one of the region’s leading event franchises for senior risk and insurance executives.­

We hope you will enjoy reading this report and benefit from its findings.

Yousuf Al-Jaida CEO & Board Member, Qatar Financial Centre

5 «Transparency concerning the most recent developments in insurance is key to benchmark the progress of our sector with those in other markets, learn from best practice and guide our decisions. To the QFC the MENA Insurance Pulse is an important tool, which provides us with this kind of information in a concise fashion.»

Yousuf Al-Jaida, CEO & Board Member, Qatar Financial Centre

6 Methodology

The findings of this report are based on in-depth and structured telephone or face-to-face interviews with executives representing 40 regional and international (re) insurance companies, intermediaries and trade associations. The interviews were conducted by Dr. Schanz, Alms & Company, a Zurich-based research, communication and business development consultancy, in December 2016 and January 2017.

The interviewees that participated in the survey were from the following companies and organisations based in the respective countries:

Abu Dhabi National Insurance Company, UAE Africa Re, Egypt Al Wathba National Insurance Company, UAE American International Group (AIG), UAE Arab Insurance Group (Arig), Bahrain Chedid Re, Lebanon Damana Saudi Arabian Insurance Company, Bahrain Dubai International Financial Centre Insurance & Reinsurance Association, UAE Emirates Insurance Association, UAE Emirates Insurance Company, UAE Federation of Afro-Asian Insurers & Reinsurers (FAIR), Egypt Gulf Insurance Federation, UAE Hannover Re, Bahrain Kay International AMEA, UAE Kuwait Insurance Company, Kuwait Lloyd’s, UAE Marsh MENA, UAE MIG Holding, Bahrain Munich Re, Germany Munich Re Underwriting Agents, UAE National General Insurance Company, UAE Noor Takaful, UAE Oman Insurance Company, UAE Orient Insurance Group, UAE Qatar General Insurance & Reinsurance Company, Qatar Qatar Insurance Company, Qatar PartnerRe, Switzerland Peak Re, Hong Kong SAR, China Saudi Re, Saudi Arabia SCOR SE, France SEIB Insurance & Reinsurance Company, Qatar Société Centrale de Réassurance, Morocco Solidarity Group, Bahrain Swiss Re, Switzerland Tokio Marine, UAE Trust International Group, Jordan Trust Re, Bahrain United Insurance Company, Yemen Vision Insurance, Oman Zaris & Partners, Lebanon

7 «Awareness and penetration of personal insurance in the MENA region continues to improve, particularly with the introduction of new digital distribution channels and banc­ assurance. This provides an opportunity, from which both insurance companies and clients can benefit.»

Michael S. Jensen, Managing Director MENA Zone, AIG

8 Summary of Key Findings

Despite the continued economic slowdown and geopolitical instability, the MENA insurance markets can be considered resilient. 76% of executives polled expect regional premiums to outgrow GDP over the next 12 months. Survey participants continue to be particularly bullish about personal lines business, which benefits from expanding compulsory insurance requirements as well as pricing support from regulatory action. Even though the executives anticipate further economic headwinds and fiscal tightening, price adequacy in commercial lines, especially in property business, has improved, too, mainly in response to more frequent fire losses.

Participants consider the region’s strong direct insurance market growth as its most important current strength, followed by a relatively moderate natural catastrophe exposure and improved regulatory regimes.

The region’s low insurance penetration is considered the key future opportunity offered by the market. The ratio of premiums to GDP is a mere quarter of the global average. In addition, expanded or more rigorously enforced compulsory schemes in medical and motor insurance rank second among future opportunities. Digitisation is the third most frequently mentioned opportunity because of its potential to both bring down operating and acquisition expenses as well as to make insurance products more appealing and meaningful.

The Pulse found that 54% and 86% of executives polled view current prices in MENA commercial and personal lines business, respectively, as being at or above the average of the past three years – a major improvement in sentiment, against 11% and 74%, respectively, in the previous year. 70% and 89%, respectively, expect commercial and personal lines rates to remain stable or increase further over the next 12 months, which compared with the previous year, indicates an improved outlook for commercial lines and slightly deteriorating expectations for personal lines. Commercial and regulatory pressure for higher or at least stable prices is expected to continue.

Only 33% – virtually unchanged from the previous year – of respondents expect market concentration to increase over the next 12 months. The relatively comfortable capitalisation of domestic companies in conjunction with family ownership continue to present major obstacles to mergers and acquisitions. However, going forward, it will become more difficult for domestic insurers to raise the additional capital potentially needed to meet new risk-based capital requirements. In addition, as reinsurers insist on higher retentions, an increasing number of shareholders with limited risk appetite is expected to withdraw from insurance companies.

The Pulse also found that 60% – up from 47% – of respondents expect the market share of foreign primary insurers to remain stable over the next 12 months. The share of those anticipating a reduction in foreign market share has decreased slightly from 36% to 32%. Interviewees continue to mention some high-profile market exits and retrenchment programmes as a result of significant underwriting losses and a perceived deterioration of the market outlook. These moves are expected to favour domestic and regional market leaders. Also, some local insurers have stepped up their game, both in terms of underwriting capacity and expertise.

9 Summary of Key Findings

32% of respondents – virtually unchanged from the previous year – expect Takaful insurance to underperform the market as a whole in terms of growth. At 19%, the share of those expecting it to outperform has decreased slightly. Many executives continue to feel that Takaful offers no genuine differentiation and does not even live up to the concept of mutuality, given conflicting interests of policyholders and share- holders. This lack of a ‘Unique Selling Proposition’ forces many Takaful insurers to engage in fierce price competition.

10 Key Pulse Readings

The Pulse measures current perceptions of the insurance market in the MENA region, tracking them over time to monitor changes in attitudes. When comparing 2017 with 2016, the two main differences in findings are:

— A more bullish view of insurance premium growth outperforming GDP growth

— An improved assessment of current pricing and technical profitability levels in commercial and personal lines.

Key readings (in % of respondents agreeing) 2013 2014 2015 2016 2017

76 68 76 70 Insurance premiums to grow faster than GDP* 61

Insurance prices are currently low** 91 84 86 89 — Commercial lines 46 55 36 34 — Personal lines 26 14

Insurance prices to remain stable or increase* 84 81 77 70 58 — Commercial lines 91 89 97 89 — Personal lines 72

Insurance profitability is currently low** 66 62 81 72 — Commercial lines 33 39 46 — Personal lines 30 23 30

Insurance profitability to remain stable or improve* 84 84 81 — Commercial lines 77 78 95 83 85 89 — Personal lines 72

36 36 33 Insurance markets to consolidate* 16 19 50 35 32 Foreign market share to increase* 17 8 38 Takaful insurance to outgrow total market* 22 21 23 19

*Over the next 12 months **Compared with three-year average

11 «A lack of customer centricity is a historical weakness of the global insurance industry. This is particularly true of the MENA markets which are very much driven by price competition. Encouragingly, we are witnessing a trend towards service quality becoming a key success factor, especially in personal lines. I expect this shift to further boost insurance penetration across the region.»

Constantinos Hadjigeorgiou, Group Corporate Services Officer, Trust Re

12 Market Overview MENA GDP growth in line with global average

This overview covers 14 countries in the Middle East and North Africa: Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, Turkey and the United Arab Emirates. The country selection (hereafter referred to as MENA) reflects the availability of internationally comparable insurance data.

In 2015, these 14 countries, with a total population of about 396 million, generated a combined GDP of around US$ 3.2 trillion, which is equivalent to 4.4% of the world’s total. As an economic block, the region would rank as the world’s fifth-largest economy, slightly smaller than Germany’s.

At an inflation-adjusted growth rate of 3.6% per annum between 2010 and 2015, the region’s economies (excluding Turkey) grew at a slightly slower pace than the global economy (3.8%). Going forward, this pattern is expected to persist, with the region trailing slightly behind the global economy’s projected pace of growth (see chart 1). Reduced public spending as a result of lower oil prices and unresolved regional conflicts will continue to weigh on the MENA region’s near-term economic prospects.

Chart 1: Real GDP growth (2010 – 2021f, annual averages, in %)

6

5

4

3

2

1

0 Iran UAE Egypt World Turkey MENA* Morocco Saudi Arabia Saudi

2010 – 2015 2016 – 2021 (estimates, forecasts)

Source: IMF, World Economic Outlook (October 2016): * excluding Turkey (as per the IMF’s classification)

13 Market Overview

Continued economic slowdown in oil-exporting countries

According to the International Monetary Fund, the recent moderate recovery in oil prices is not expected to noticeably revive economic growth in oil-exporting countries. Most are likely to continue fiscal tightening in response to structurally lower oil revenues. Austerity policies in most countries of the Gulf Cooperation Council (GCC) are projected to hold back economic growth over the near-term.

In Iraq, higher-than-expected oil production will benefit the domestic economy, partially offset by continued security challenges and lower investment in the oil sector following declining prices.

The Islamic Republic of Iran’s outlook has brightened as a result of higher oil production following the lifting of sanctions. However, the country’s future economic prospects will largely depend on its reintegration into global financial markets and domestic economic reforms.

Recent reforms (e.g. in the area of taxation and subsidies) and lower oil prices have helped macroeconomic stability in many oil-importing countries of the MENA region. However, economic prospects remain vulnerable to security concerns and social tensions.

Chart 2: MENA insurance premiums by type (2010 – 2015, non-life versus life, in US$ billion)

46.1 43.9 40.2 37.3 34.5 30.3

5.8 6.5 6.9 7.6 7.9 8.2

2010 2011 2012 2013 2014 2015

Non-Life Life

Source: Swiss Re Economic Research & Consulting

14 Market Overview

MENA insurance penetration on the rise

Income per capita levels in the MENA region as a whole are similar to the global average. The region’s insurance penetration levels, however, remain extraordinarily low. In 2015, insurance premiums accounted for just 1.7% of GDP, about a quarter of the global average. Encouragingly, this gap is narrowing as MENA insurance markets outpace regional GDP growth. Between 2010 and 2015, total non-life and life insurance premium volumes in the region expanded more than twice as fast as GDP (see charts 3 and 4). Going forward, this trend is expected to continue. Swiss Re (Global Insurance Review 2016 and Outlook 2017/18) forecasts real annual premium growth of more than 5% for 2017 and 2018, higher than the International Monetary Fund’s economic growth forecast for the region.

According to chart 2, at a share of 15%, life business continues to play a relatively minor role in the MENA region (in comparison with its global share of 56%).

Chart 3: Non-life real premium growth (2010 – 2015, annual averages, in %)

14.2 Saudi Arabia 8.9 MENA 8.5 Turkey 8.0 Iran 7.6 UAE 4.3 Morocco 2.6 Global

Source: Swiss Re Economic Research & Consulting

15 «Insurance is an essential factor in stimulating the economic growth and stability throughout the MENA region. The sector also has an important potential to facilitate the development of financial markets. In Qatar we have experi­ enced significant premium growth over the course of the recent years, driven by population growth, higher disposable income as well as large scale infrastructure projects and the ongoing expansion and diversification of Qatar’s economy.»​

Dr. Haitham Al-Salama, Chief Economic Adviser, Qatar Financial Centre

16 Market Overview

Chart 4: Life real premium growth (2010 – 2015, annual averages, in %)

17.0 UAE 14.8 Iran 8.2 MENA 7. 2 Morocco 5.2 Turkey 4.0 Global –3.6 KSA

Source: Swiss Re Economic Research & Consulting

Chart 5 reveals that the region’s four largest insurance markets – Turkey, Iran, UAE and Saudi Arabia – account for more than 70% of the total premium pot.

Chart 5: Geographical split of MENA insurance premiums (2015, share in %)

Algeria Egypt Others 2 % 9 % 4 %

Iran 14 % UAE 19 %

Lebanon 3 %

Morocco 6 %

Qatar 5 %

Turkey 20 % Saudi Arabia 18 %

Source: Swiss Re Economic Research & Consulting

17 Market Overview

Chart 6 provides the lines of business split for a number of MENA non-life insurance markets. Motor is by far the largest segment in major markets such as Turkey, Iran and Morocco. However, over the past few years, personal accident and health insurance have been the fastest-growing segments in Saudi Arabia and the UAE, and now represent the biggest market segment in these two countries. The main drivers behind this spectacular growth are legislation, in particular compulsory insurance requirements, and population growth. Compulsory health insurance schemes are expected to further spread across the region.

Chart 6: Lines of business split, 2014-15, in %

100

90

80

70

60

50

40

30

20 Motor

Property

10 PA/Health

Marine/Aviation/Transport

0 Miscellaneous * 2015 Iran* KSA*

UAE* ** 2014 Oman* Qatar** Turkey* Egypt** Bahrain* Kuwait** Morocco*

Source: National Supervisory Authorities

18 Market Overview

Chart 7 illustrates the supply side structure of the region’s insurance markets, demon- strating the significant intra-regional differences in market structure, ranging from highly concentrated markets such as Iran to relatively fragmented environments such as in the GCC. Reasons for the former include powerful national champions with a strong record of market leadership, whereas the latter are characterised by relatively low barriers to entry and family ownership structures that inhibit consolidation.

Chart 7: Non-life insurance market share of Top 5 insurers, 2014-15, in %

90

80 78 73 69 70

61 60 53 50 50 47 42 39 40

30

20

10

0 1 KSA* UAE* Iran** Oman* Turkey* Egypt** Qatar** Bahrain* Morocco*

Source: National insurance associations and supervisory authorities; 2014 data**, 2015 data*, 1 figure for Qatar does not include Al Koot

19 Insurance matters to Qatar’s economic development and transformation By Yousuf Al-Jaida, CEO & Board Member, Qatar Financial Centre

Qatar remains firmly committed to its National Vision 2030, which sets out a balanced and sustainable growth agenda based on the four key pillars of social, economic, human and environmental develop- ment. They will contribute to creating a diversified, knowledge-based economy with a substantial and competitive private sector, supported by modern, state-of-the-art public institutions. The development of Qatar’s human capital or ‘software’ takes centre stage as education, health and research are priority areas for investment.

In order to fully capture the nation’s potential, Qatar heavily invests in infrastructure, such as a new rail and metro network, roads, power plants and hotels. These projects will be completed in time for the FIFA World Cup 2022. The respective investments are set to boost Qatar’s non-hydrocarbon economy. According to the Qatar National Bank (QNB) in 2015 this new growth engine already accounted for more than 60% of the country’s GDP and helps to offset the current contraction in the oil and gas sector.

The challenges facing commodity-exporting countries are well known. In 2016, Qatar’s GDP is expected to have grown by 3.4% in real terms, still ahead of the global average of close to 3.2% and the advanced economies of 1.9% (according to the IMF). Nevertheless, as a result of lower oil and gas prices, fiscal tightening is an imperative for Qatar, too. Therefore, in 2016 the Government reduced its spending and in order to cover the fiscal shortfall, Qatar raised debt with at the time one of the largest sovereign issuances in the Middle East of US$ 9 billion in May 2016. The country’s debt to GDP ratio of roughly 50%, also according to the IMF, remains extraordinarily low by international standards, affording much leeway to the country. Although, in 2016, the Government recorded its first fiscal deficit in 15 years, it did not tap into the nation’s reserves and savings, held by the Qatar Investment Authority, for example.

Insurance as a catalyst for financial market and economic development The insurance industry has an eminent role to play in contributing to economic growth and societal development. The sector is a prerequisite to effective corporate lending through the banking system because it prevents businesses from suffering life-threatening liquidity and solvency problems in case of major insured losses. The indemnification and risk pooling properties of insurance effectively facilitate commercial transactions and the economically vital provision of credit by mitigating losses.

Insurance can be considered a fundamental prerequisite to doing business, an indispensable «lubricant of commerce». However, its relevance goes beyond the real economy: Insurers help accumulate and invest huge amounts of capital, almost US$ 30 trillion globally, making the industry one of the world’s largest institutional investors, alongside pension funds and mutual funds. This crucial role in financial intermediation is particularly relevant to countries such as Qatar, which are in the process of developing broader and deeper domestic capital markets as well as a stronger savings culture.

More specifically, insurers play a major role in funding infrastructure projects in both mature and emerging economies. There is a growing need for infrastructure investments globally while banks are under pressure to curtail long-term lending as a result of regulatory and deleveraging pressures. Given the long-term nature of their liabilities, insurers and pension funds are ideally suited to provide a long-term asset base, filling the infrastructure financing gap.

In general, we see a major potential for the services sector in Qatar which, at around 30% of GDP, according to current statistics from the World Bank, is currently still relatively small for a country which boasts the world’s highest income per capita. In this context, insurance is a particularly striking

20 example of a low penetration in financial services: At annual premiums of close to US$ 3 billion, the sector accounts for just 1.5% of Qatar’s GDP. This compares with the global average of more than 6%. There are still major cultural and institutional obstacles to insurance growth that need to be dealt with, e.g. through promoting Sharia-compliant Takaful insurance and enhancing regulatory frameworks. The potential is undoubtedly there, in particular in retail insurance, and the Government is highly committed to supporting the industry’s growth by transferring additional risk management and provisioning tasks to private insurers, for example in the area of healthcare.

The role of the Qatar Financial Centre The QFC is a fully onshore business and financial centre located in Doha, and provides an excellent platform for firms to incorporate and do business in Qatar and the region. It offers its own legal, regulatory, tax and business infrastructure, which allows 100% foreign ownership, unlimited repatriation of profits, no restrictions on the currency used for trading, and charges a competitive rate of 10% corporate tax on locally sourced profits.

These foundations have helped to foster Doha’s world-class business environment. Qatar is currently ranked as the 18th most business-friendly country in the world, according to the ‘World Economic Forum Global Competitiveness Report 2016’ and within the top 20 financial centres worldwide, according to the Global Financial Centre Index 2015.

To sum up, Qatar’s medium-term economic outlook remains positive. Large infrastructure investments and increased production in non-hydrocarbons sectors such as manufacturing and services are set to support the continued expansion of the economy. Strong fiscal reserves and the ability to issue debt at attractive terms generate additional resilience.

This also augurs well for Qatar’s insurance sector as economic growth is arguably the biggest single determinant of insurance premium growth. In addition, the ongoing diversification of the economy will give rise to a changing risk landscape and, accordingly, new opportunities for insurers and reinsurers. Finally, the Government of Qatar encourages a stronger involvement of insurers in hitherto publically provided risk transfer and management tasks.

21 The irresistible rise of InsurTech in the Middle East By Michael S. Jensen, Managing Director MENA Zone, AIG

InsurTech has, quite drily, been defined as ‘the use of technological innovations to squeeze out savings and efficiencies from the current insurance industry model.’ However, what we are now witnessing is nothing short of a revolution, taking place not only in the insurance sector, but across the entire financial services industry.

Technology has been quick to revolutionise many industries, but the insurance industry, both globally and in this region, cannot be counted among these. Until recently, it had changed little since its inception. However, technology is now challenging traditional insurance business models and the industry has entered a phase of profound transformation, in the MENA region and beyond.

There is a fundamental shift in the way insurance companies both assess, manage and price risk, and engage with their customer. This is driven by the need to meet the changing needs of customers, remain relevant and become more efficient – and will be facilitated and enabled by the adoption and use of new technology and digital transformation.

Whilst change is taking place in nearly all aspects of the industry, we believe there are two key areas where the impact of InsurTech is most visible: data analysis and customer engagement.

Data analysis As the number and type of internet-connected devices increases, insurers are able to gather and analyse the behaviour, actions and choices of their customers more accurately than ever before. Estimates suggest that, globally, there will be more than 50 billion connected devices by the end of the decade, up from 500 million 10 years ago; truly staggering growth. From Dubai – which is well on its way to becoming one of the world’s smartest and most ‘connected’ cities – outwards, we are witnessing a growing trend in the use of connected devices in the region.

The gathering and analysis of data is something that insurance companies have been doing for decades, and advances in technology will not change this. However, the ability to generate, gather and analyse huge data sets, and factor these into risk calculations and product offerings, is catapulting the industry into a new age and a new way of conducting business.

We have connected devices in our homes, cars, pockets, on our wrists and even inside our bodies. All of these generate and gather data on any number of things – where we have been, how we drive, how far we have walked, what time we got to work, our health and so on. The analysis of such data provides insights with which insurers can develop risk profiles for individuals, in real time. This has never been possible before and the insurance industry, which has always been at the heart of data-driven analytics and risk mitigation, now needs to capitalise on the huge benefits and opportunities offered by this. Regional insurers must also take note of these fundamental changes and alter their business models and approach, or risk being left behind.

If insurers are able to successfully marry data generated by these devices with the historic data they have always gathered, they have a powerful ability to price risk more effectively and revolutionise the insurance products and services they offer their customers.

Telematics in cars is the obvious example of this – real time data on driving style, conditions, and times of use, combined with traditional factors used to price car insurance, such as age, gender, car make/ model and geography, will lead to a far more bespoke premium, that can be changed on an ongoing basis, providing a much more accurate and personally tailored product for the customer.

22 Customer engagement Today’s customer behaviours and expectations are evolving quickly, driven largely by the massive use of smart phones – particularly in several MENA countries, from Egypt to Saudi Arabia, which have some of the highest mobile penetration rates in the world. Customers expect the same ease of use, access and transparency from their insurers as they get, for example, through mobile banking or car sharing apps. To achieve this, insurers must not just embrace technology, but further drive its development and application throughout the entire organisation. They also need to change their employee mind-sets and sales and marketing approach in order to adapt to this new paradigm.

Whether it is automated registration, utilising information from customers’ social media profiles, or automated claims and settlements being managed in real time, each of these new applications can not only improve the customer’s experience, but can also drive further penetration of insurance, by simplifying access. The Middle East is under-insured compare to other global regions, so promoting more awareness about and ease of access to insurance in the region will undoubtedly drive the regional insurance market forward.

Staying ahead Navigating this new landscape is no mean feat. Valid concerns about privacy and the security of personal data are prevalent, while there is a general cultural aversion to data being collected on individuals’ behaviour. Insurance firms must work to address and assuage these fears, and demonstrate to customers the tangible benefits of real time data collection and utilisation, particularly in some of the more conservative societies in this region.

To do this, insurance firms must put innovation at the heart of their strategy, bolstering their technology capabilities, either in-house, through the acquisition of firms with relevant technology, or through incubator programmes or strategic partnerships with FinTech companies.

In the last few months, we have seen positive developments in the regional FinTech space, with the launch of two world-class FinTech hubs: the DIFC FinTech Hive in Dubai and the ADGM FinTech Regulatory Laboratory in Abu Dhabi. The technological innovations developed here should be eagerly embraced by the regional insurance industry.

The benefits and opportunities provided by InsurTech abound; however, it is a highly competitive and dynamic landscape. Regional insurance firms that will succeed by benefiting from them recognise that the fundamentals of their industry have changed, and are willing to move with the times. Those that don’t, run the risk of being left behind – quickly.

23 Global energy outlook and its implications for the MENA region By Fadi AbuNahl, Group CEO, Trust Re

When in Fall 2016 Trust Re issued its whitepaper on the global energy landscape, the sector was navigating in choppy waters. Sluggish economic growth, persistent low interest rates and the dramatic slump in oil and gas prices since 2014 had led to dislocations in the global energy market place. The glut of oil, coupled with overcapacities in coal, heavily affected investments into future energy capacity and caused postponements or cancellations of energy projects.

As a result of the low oil price environment since mid-2015 the GCC countries implemented austerity measures. Due to lower subsidies, reduced government spending, in particular on infrastructure projects, growth in the GCC countries declined from 3.8% in 2015 to 1.9% in 2016.

Since February 2016 oil prices recovered from a low of US$ 30 to more than US$ 52 in January 2017, benefiting from the agreement of OPEC and non-OPEC producers to stabilize and cut supply, reached in November last year. Improved pricing and mildly improved economic outlook for OECD countries will have little bearing on the fundamental changes that the global energy sector will undergo. Demand is projected to grow by 30% to 50% from 2014 to 2040, predominately driven by non-OECD countries due to an accelerating industrialization, population growth and the expansion of the middle class. The OECD countries, by contrast, will consume less energy by 2040 than today, while demand from non-OECD markets will rise by more than 70%, originating foremost from Asia, which will consume roughly three quarters of the global energy production by 2040.

Investments of close to US$ 70 trillion are required to meet the expected increase in energy demand until 2040. Almost 40% of these are needed to assure oil and gas supplies, while 30% will be used for investments in power supply and another 30% will contribute to reduce the consumption of energy via higher end-consumer efficiency.

Technology plays an important role in the demand for as well as supply and efficiency of energy. While the cost for renewable energy production will decline, cost for oil and gas extraction will increase due to higher geographical complexity of the exploration sites. The energy mix is set to change markedly too. Oil production will grow by 15% to 30% until 2040 and will account for about two-thirds of total oil production. However, the share of oil and coal in global energy supply will decline by 9 percentage points, while renewables, gas and nuclear will gain in importance. Electricity will grow by 70%, faster than any of the primary sources of energy. By 2040, 50% of power is generated from renewables in the European Union, 30% in China and 25% in India.

Longer-term, these trends offer major opportunities to energy and power insurers and reinsurers. In the short run, margins will remain squeezed and top-line growth will be hard to come by. Technical profit- ability will thus be paramount. Insurers have to be flexible, leave established tracks and expand into new markets and technologies, where growth is still at hand.

Energy and power insurance premiums worldwide, including mutual and captive insurance business, amounted to around US$ 23.6 billion in 2014, up from around US$ 21.5 billion in 2010. In 2014, energy insurance premiums stood at around US$ 14.2 billion whereas power insurance premiums came in at approximately US$ 9.4 billion.

Upstream insurance accounted for premiums of around US$ 7.2 billion of the energy market, US$ 2.2 billion came from midstream insurance and US$ 4.8 billion from downstream insurance. As far as power insurance premiums are concerned, in 2014, around US$ 7.3 billion were generated from conventional power insurance and US$ 2.1 billion from renewable and other power insurance, the latter

24 being up from around US$ 1.5 billion in 2010. These premiums are gross insured premium and not necessarily placed in the open market.

Premium volumes in the oil & gas segment are eroding as a result of abundant capacity and also due to an increasing reliance on captives. In the downstream area sharply reduced cost of feedstock has boosted refiners’ margins, with business interruption values up accordingly. This offers opportunities in terms of additional premium income for downstream insurers while making claims multiples of actual physical loss.

A major constraint to the provision of adequate liability insurance for the energy industry is capacity. Many claims in recent years have exceeded US$ 1 billion, including clean-up costs and subsequent pure financial losses. There is also increasing demand for environmental liability and risk assessments/ risk engineering services. Fracking, for example, increases environmental legal liability exposure whilst sophisticated technologies which control the drilling are increasingly vulnerable to failure. Another growing challenge is climate risk, particularly at a time when producers are stepping into environmen- tally sensitive areas such as the Arctic.

In the Middle East region, we are noticing new government strategies to diversify into alternative power such as solar, wind, and nuclear. This will assist countries in revenue saving which otherwise was going for subsidies on power and water. The increase of nuclear energy will represent new liability challenges to countries. There is currently small capacity created for nuclear and will demand insurers and reinsurers to come together with the assistance of international pools.

Business interruption including supplier and demand contingencies are an increasing risk especially in the Middle East. This is creating rising claims figures which is challenging insurers when premiums are not adequate. New alternative risk transfer mechanisms may need to be found.

25 Peak Re’s position in the MENA region and its opportunities going forward By Jasmine Miow, Senior Vice President, Peak Re

Peak Re is one of the few reinsurers of Asian origin present in the MENA region. We started to under- write our first business in MENA in 2015. Ever since then we have steadily expanded our footprint in the region. Today we have customers in markets such as the GCC (Bahrain, Kuwait, Qatar, Saudi Arabia, United Arab Emirates), Jordan, Lebanon, Tunisia, Morocco, Egypt and Algeria. In addition, we travel to the region regularly to expand our client relationships.

We position ourselves as a traditional reinsurer based on modern foundations. Peak Re puts the traditional values of a reinsurer first: we are a reliable, responsive, loyal and long-term partner for our cedants and we pursue this approach on the foundations of our state-of-the-art systems and processes – in terms of modelling capabilities, risk management or governance structures – which allow us to establish a cost and capital efficient global franchise in a period that has seen no rate increases ever since we received our license in late 2012.

Our approach applies to all our clients – whether they are based in Asia Pacific, the MENA region or other markets. However, our positioning resonates particularly well with our cedants here, who first and foremost understand insurance as a people-business, built on trust earned over time. It has therefore been very helpful that our underwriters have been known in the region for quite some years before joining Peak Re.

In line with our overall underwriting policy, we carefully select our clients, and invest our time and build an in-depth familiarity with their book of business. Our intention is to grow along with our clients over time and support them with our experience and knowledge in various specialty lines to create sustainable value in the long run.

Our origin in Asia Pacific comes as an advantage as we build our foothold in the MENA region. Much of the market trends that we experience here, resemble the developments that we see or have already experienced in Emerging Asia. On the upside there is the speed of growth as both regions will continue to invest heavily into building their infrastructure and economic transformation, which will bring signif- icant opportunities for the (re)insurance market. For the period from 2015 to 2020, most of Emerging Asia will register an annual premium growth in the double-digits, and this will be the expected range for markets like the UAE and – to a slightly slower degree – also Saudi Arabia (according to an Emerging Market study by EY, 2016). Growth in both regions, given their low insurance penetration, is expected to increase as urbanisation and the emergence of a more affluent middle class progresses.

Furthermore, as already evident in China and other Asian markets and also approaching in some MENA markets, technological transformation and digitisation will change the foundations of insurance, the way how its products are designed and sold – providing access to new consumer segments and possibly also habits.

Tighter and more stringent regulation is creating the hotbed for insurance growth. While in parts of Emerging Asia we are experiencing these changes already, in the Middle East, we are witnessing its effects currently in Saudi Arabia and also in the UAE, where compulsory insurance schemes are creating growth in personal lines. The tighter regulation also contributes to improve rates for the benefit of the markets. However much remains to be done in Asia and the MENA to enhance the consistency of regulation and also assure its enforcement.

26 On a downside, there is also the dependency of economies in both regions on commodity prices, namely revenues generated through oil sales, their exposure to currency depreciations and the need to diversify the economies away from a dependence on single or correlated revenue streams.

Since many of these changes tend to happen slightly ahead of the MENA region in Asia, cedants can benefit from Peak Re’s experience in our home region. We thereby bring a unique asset to the table as we transfer emerging market experience from one growth market to another. As we look for durable client relationships, we will continue to share our experience, knowledge and technical know-how with our cedants, and create sustainable value into the future.

27 «Similarly to many markets in Asia Pacific, where Peak Re originates in, the MENA region is characterized by significant growth opportu­ nities such as low insurance penetration, major infrastructure needs and a growing middle class with rising demands for insurance protection. The MENA Insurance Pulse provides a precise and accurate overview on these trends and serves as a source for Peak Re in its decision making processes.»

Franz Hahn, CEO, Peak Re

28 Survey Results 1. The overall perspective: Strengths, weaknesses, opportunities and threats of MENA insurance markets

Premium growth momentum continues to be the key strength

As in prior years, the vast majority of participants consider growth (and premium growth in particular) as the most relevant strength of the MENA insurance market- place. Compulsory insurance schemes continue to lend support to insurance demand despite the economic slowdown. The second most frequently mentioned strength is the region’s relatively low natural catastrophe exposure (except for Algeria, Iran and Turkey) which supports technical profitability. For the first time ever, the regulatory environment made it to the Top 3 strengths as the rigorous Saudi regime is being adopted elsewhere in the region (especially in the UAE) and promises to strengthen overall market discipline and profitability. Government spending on major projects no longer features among the Top 3 strengths as fiscal tightening makes itself felt (see chart 8).

Chart 8: Market strengths (number of mentions)

GDP and (re)insurance growth momentum 29

Low natural catastrophe exposure 17

Regulatory regimes 13

«The UAE Insurance Authority’s new «Sophisticated modern regulatory regimes regulatory regime was introduced in late are of utmost importance to the long-term 2015 and began in earnest as of 2016. stability and development of MENA Without doubt the fundamental principles insurance markets. This is particularly it lays out will contribute to a strength- true of risk-based solvency requirements ening of our industry. The key issues are which can protect both policyholders not ones of principle but of execution by and investors from the consequences of the industry and effective enforcement by flawed or even reckless underwriting and the regulator. It seems likely that some investment decisions.» companies will struggle to comply with the new regulations and we will have to see Fahad Al-Hesni, MD/CEO, Saudi Re what actions their boards, shareholders and the Authority will take in such cases.»

Jason Light, CEO, Emirates Insurance Company

29

Survey Results – The overall perspective

Fierce competition viewed as the major weakness

As in the past, unsatisfactory rates and profitability levels as a result of excess capital and fierce competition are perceived as the most relevant weaknesses of the MENA insurance marketplace. This view is strongest for the relatively easily accessible and mostly catastrophe-free GCC countries which continue to attract reinsurance capacity from all over the world. The talent gap ranks second, as in 2016, as workforce localisation requirements are enforced and the influx of expatriate workers slows. The continued dependency of many regional economies on hydrocarbon revenues ranks third, as a strong and sustainable rebound of oil and gas prices continues to appear elusive (see chart 9).

Chart 9: Market weaknesses (number of mentions)

Excess supply 24

Talent gap 18

Dependency on hydrocarbon revenues 16

«Insurers in the MENA region «In the MENA region our industry «A lack of innovation is one of the are faced with significant risks of continues to suffer from its inability weaknesses of MENA insurance change. For example, regulators to create new business opportunities. markets. It ranges from product play a much more active role in Players still compete for the same design to distribution and is partly to the market place. They mandate sized cake. As a result, rates decline, blame for the region’s low insurance new policy forms, stipulate specific conditions loosen and profitability penetration. However, this state of pricing and reserving requirements erodes. In short, markets become affairs presents a major opportunity and phase-in complex risk-based less robust from a policyholder’s to innovative carriers who come capital regimes, to name but a few perspective and less attractive in the up with products that are tailored regulatory initiatives. Against this eye of investors.» to local circumstances and prefer- backdrop, the region’s insurers have ences, rather than simply copying Omar Gouda, Regional Director, to step up their game and need to approaches from abroad.» North East Africa and Middle East build additional skills and know-how. Region, Africa Re Youssef Al Kareh, General Manager This imperative will also influence & Executive Vice President, Damana their future relationships with leading Saudi Arabian Insurance Company reinsurers.»

Andreas Pollmann, Client Management Executive MENA, Munich Re

31 Survey Results – The overall perspective

Catch-up potential continues to be the most important opportunity

As in 2016, low penetration levels are the most frequently mentioned opportunity offered by MENA insurance markets. The average share of premiums in the region’s GDP is about one quarter of the global level. This gap suggests major catch-up potential given the region’s relatively high average GDP. However, some executives point to potential structural reasons for the region’s low penetration rates, such as the absence of major natural perils and still generous government-sponsored social security schemes. The fledgling status of the life insurance sector is also attributable to the large number of expatriates who tend to buy cover at home. In general, there are no tax incentives for buying life insurance, which in other parts of the world, is a major driver of demand. Having said this, the gradual retrenchment of governments as ‘lenders of last resort’ and providers of ‘cradle to grave’ protection is widely expected to structurally boost insurance demand going forward. In addition, many respon- dents see potential for a higher voluntary insurance demand, for example in home, long-term and credit insurance.

Chart 10: Market opportunities (number of mentions)

Low penetration

Compulsory insurance

Digital technology

«Despite harsh economic conditions the region’s insurance markets have proven quite resilient. Premium growth continues to be fundamen- tally supported by low penetration rates, growing populations, higher risk awareness and expanded compulsory insurance schemes. Having said this, profitability remains under pressure from excess capacity, sub-optimal underwriting standards and continued claims inflation.»

Ashraf Bseisu, Group CEO, Solidarity Group Holding

32 Expanded or better enforced compulsory schemes rank second, as in the previous year. Personal lines insurance business, such as medical insurance, is expected to remain the markets’ main engine of growth. In addition, demand for liability cover (e.g. professional indemnity) is expected to receive a shot in the arm from additional compulsory insurance requirements. A newcomer among the Top 3 opportunities is technology. Digitisation is increasingly viewed as offering the potential for both bringing down operating and acquisition expenses as well as for making insurance products more appealing and meaningful (see chart 10).

26 20 16

«The MENA region offers a huge «Modern technologies offer a major potential for embracing modern opportunity for the region’s insurance technologies to promote product markets. They do not only allow to innovation. The spectrum ranges cut administrative and acquisition from personal lines to SME expenses but also help improve commercial business, including customer satisfaction and retention. cyber, drone and political risk In personal lines in particular, insurance, for example. The benefits digitisation will reshape all parts of are not limited to the availability of the insurance value chain, fuelled by more differentiated, relevant and customers’ price-driven approach to appealing products. In addition, insurance buying.» a whole-sale modernisation of the Ronald Chidiac, CEO, Zaris & region’s insurance industry would Partners also make it more attractive to local and international talent.»

Walid Sidani, MD & CEO, Kay International AMEA Limited

33 «We have recently witnessed a remarkable self-correction of the market, mainly on the pricing front. It is particularly encouraging that this development is not just a result of growing pressure from regulators and reinsurers. It also reflects a learning process among an increasing number of locally operating direct insurers.»

Christos Adamantiadis, CEO, Oman Insurance Company

34 Survey Results – The overall perspective

Economic slowdown remains the most important challenge

As in 2015 and 2016, the majority of respondents consider economic risks to be the most relevant challenge to their operating environment. The fall in oil prices since the summer of 2014 continued through 2015 and dramatically accelerated in early 2016, increasing nervousness among many respondents because of adverse effects on government spending, disposable incomes and financial markets. The most recent uptick in prices is not deemed to be sufficient to remedy this situation.

Geopolitical risks rank second but were mentioned less frequently than in 2016. The prospect of Iran re-joining the international community, stabilisation in Egypt and the slightly improved odds for an end to the Syrian tragedy have lifted spirits.

The third most frequently mentioned risk factor, a newcomer, is the threat of excessive or ineffective regulation. Many executives bemoan spiralling costs of compliance and feel that some regulators are overzealous and pursue the wrong priorities, e.g. by adopting a heavy-handed rules-based approach to regulating the industry, rather than implementing key reforms such as risk-based solvency capital (see chart 11).

Chart 11: Market threats and challenges (number of mentions)

Economic slowdown 27

Political instability 18

Excessive regulations 16

«The slow pace of economic growth, «Overall, the regulatory framework «Insurers need to innovate in order coupled with severe competition has greatly improved and to increase customer satisfaction and and inferior reinsurance support, strengthened in recent years in the strengthen their competitiveness. is expected to expose the region’s MENA region. However, we see some This is the most promising recipe insurance market to new levels of tendencies of a slightly excessive for addressing the current business threat.» regulatory tightening or a discrepancy challenges. The prospects for between adequate regulation and achieving this are good given the Bassam A. Chilmeran, CEO, Al its proper enforcement. Finally there potential offered by digitisation in a Wathba National Insurance Company are still some markets in the region region with one of the world’s most where we regard the regulation as favourable demographic structures insufficient.» and a highly IT savvy young gener- ation.» Dr. Frank Mayer, Senior Executive Officer, Munich Re Underwriting Dr. Adel Mounir, Secretary General, Agents (DIFC) Federation of Afro-Asian Insurers & Reinsurers (FAIR)

35 «MENA insurers would be well-advised to take a more long-term approach to their technical profitability. In the current ultra-soft market environment it will be very tough to secure corporate survival through price competition only. A more promising approach towards the future is a differentiation strategy, ranging from products to services and effectively reshaping what today is a largely commoditised market.»

Farid Chedid, Chairman & CEO, Chedid Capital and CEO, SEIB Insurance & Reinsurance

36 Survey Results – General insurance market status and outlook

2. General insurance market status and outlook

Price levels in both commercial and personal lines more favourable

As opposed to 89% of those interviewed in the previous year, only 46% of the 2017 survey participants regard current prices in MENA commercial lines business as being below the average of the past three years. Even though competition remains fierce, reflecting the continued abundant supply of reinsurance, property insurance rates in Saudi Arabia and the UAE have somewhat recovered. Both markets account for almost 40% of total MENA insurance premiums. The elevated number of fires in high-rise buildings has prompted reinsurers to further tighten terms and conditions, for example by requiring higher net retentions from cedants or by cutting commission payments. As a result, original rates in some commercial markets have increased. 27% of the executives polled even believe that, in aggregate, commercial lines rates exceed the average of the past three years. Having said this, many remain concerned about the sustainability of these improvements, given the continued abundance of reinsurance capacity in combination with much reduced construction activities.

«With lower economic growth and a «Throughout the region we observe slightly depleted return on investments, large variances in rates. Commercial as well as the introduction of risk-based lines remain very competitive. Rates for solvency regimes and actuarial pricing personal lines are higher in Saudi Arabia and reserving, most MENA insurance and the UAE, where tighter regulation companies are putting more emphasis on has helped to improve pricing levels. their underwriting profitability, and devel- However, in other places, for instance oping new underwriting and distribution Qatar, rates are still unsustainable. Due to strategies accordingly. In many markets, the slow-down in economic growth and the this is also resulting in price increases in low oil price, large projects have stalled. compulsory lines, which should expand Premium volumes collapsed, which further progressively to other lines depending on exerts pressure on rates.» pricing levels and technical profitability. Stephan Wirz, Head CM Middle East P&C In a market adjustment phase like this, & L&H, Europe, Middle East & Africa, the support of tested premium reinsurance Swiss Re securities is of paramount importance.»

Hedi Hachicha, CUO, Head of Africa & Middle East, SCOR Global P&C

37

Survey Results – General insurance market status and outlook

Survey participants continue to judge personal lines business more favourably, with 86% – up from 74% – saying that premium rates are higher or in line with the average of the past three years. This figure compares with 54% in commercial lines. Since 2013, regulators have become more active in pushing prices to more sustainable levels and enforce an actuarial approach to pricing, for example in the health insurance markets of Bahrain, Jordan and Saudi Arabia. Major developments have also taken place in the UAE recently. In motor insurance, for example, tighter and unified policy wordings, in combination with minimum rates are starting to have the desired effect. In addition, more fundamentally, personal lines business is charac- terised by a smaller number of players, higher barriers to entry, greater customer loyalty and more scope for non-price competition. Personal lines business also tends to be structurally more adequately priced as it is largely retained by insurance companies (see charts 12 and 13).

Chart 12: Current level of rates – Chart 13: Current level of rates – Commercial lines Personal lines Low High 14 % 27 % High 28 %

Low 46 %

Average 58 %

Average 27 %

39 Survey Results – General insurance market status and outlook

Improving pricing outlook in commercial lines

Compared with 2016, the pricing outlook for commercial lines has improved. 70% of executives polled expect stable or higher rates over the next 12 months, up from 58%. The majority view is that reinsurers will remain firm on terms and conditions, enforcing continued discipline in original markets. Having said this, the prospect of shrinking volumes of business as a result of fiscal tightening by governments is weighing on interviewees’ sentiment, with the rating outlook for marine and engineering business considered to be particularly challenging.

By contrast, the pricing outlook for personal lines has slightly deteriorated, but overall, remains strong. The share of those expecting stable or higher rates has decreased to 89%, down from 97%. In combination with minimum rates, the enforcement of actuarial pricing and reserving by regulators will put a floor under prices. At the same time, inflationary claims trends in the motor and medical lines of business are expected to remain challenging, hitting insurers’ retentions and instilling technical discipline (see charts 14 and 15).

Chart 14: Pricing outlook – Chart 15: Pricing outlook – Commercial lines Personal lines

Lower

Higher 11 % Lower 30 % 30 %

Stable 32 % Higher Stable 57 % 40 %

40 Survey Results – General insurance market status and outlook

Improved technical profitability in both personal and commercial lines

The survey found that only 33%, sharply down from down from 72%, of respondents consider overall profitability in commercial lines to be low, benchmarked against the past three years. On the one hand, rates have somewhat recovered over the past 12 months. At the same time, and on the other hand, the frequency of larger fire losses decreased markedly in 2016, partly as a result of improved safety regulations, e.g. for high-rise buildings. In addition, the advent or prospect of modern risk-based capital regimes has prompted insurance executives to place more emphasis on technical profitability as volatile equity and property investments will entail sharply increased solvency capital charges.

Chart 16: Current level of technical profitability – Chart 17: Current level of technical profitability – Commercial lines Personal lines

High High 24 % Low 21 % Low 33 % 30 %

Average Average 43 % 49 %

41 Survey Results – General insurance market status and outlook

70% of executives consider current technical profitability in personal lines as higher or in line with the average of the past three years, up from 54% in the previous year. Having said this, as opposed to past Pulse reports, personal lines business is no longer viewed as more favourable than commercial lines, given the significant improvements in sentiment recorded in the commercial space. The positive view on personal lines profitability reflects regulatory action coming to fruition, reduced under- writing and claims settlement expenses as a result of heightened cost discipline and profitable growth opportunities for local insurers in the wake of the perceived retreat of foreign multinational operators (see charts 16 and 17).

«It is imperative for MENA insurers «Higher retentions are a necessary «Despite its rapid growth over the to adhere to strict technical disci- condition for improved technical past 10 years the MENA insurance pline. That’s the only way to address profitability in MENA insurance market place remains relatively the massive challenges of today’s markets. Having more skin in the immature. The lack of technical market place such as dwindling game would incentivise carriers to expertise in combination with excess investment income and heightened tighten underwriting discipline, to capacity and sometimes irrespon- pressure from reinsurers on cedants the benefit of the market as a whole. sible competition require a rigorous to have more ‘skin in the game’.» Reinsurers have to play a key part regulatory response. It would be here. Inundating the region with premature and even detrimental to Omer Elamin, President, Orient under-priced capacity is not in their regional insurers’ health and sustain- Group long-term interest and undermines ability to simply leave insurance the insurance markets’ long-term supply and demand to the market viability.» mechanism.»

Nagib Bahous, President & CEO, Sami Sharif, CEO, Kuwait Insurance MIG Holding Company

42 Survey Results – General insurance market status and outlook

Stable to stronger profitability outlook

49% of executives polled expect profitability in both commercial and personal lines to remain unchanged over the next 12 months. However, the balance of the remainder of responses has shifted towards those expecting improvements. This is particularly true of personal lines where 46% of executives polled expect higher levels of technical profitability, up from 29% in the previous year. Participants expect a continuation of regulatory support but also cite improvements in claims management practices, a key success factor in an environment of low rates.

In commercial lines, while ample reinsurance capacity will weigh on margins, corrective measures on the pricing, reserving and claims settlement side will continue to make themselves felt. In addition, technical profitability is expected to benefit from further improved safety regulations and relentless pressure from reinsurers (see charts 18 and 19).

Chart 18: Outlook technical profitability – Chart 19: Outlook technical profitability – Commercial lines Personal lines Lower Lower 5 % Higher 19 % Higher 32 % 46 %

Stable Stable 49 % 49 %

43 «While the MENA insurance industry is already equipped with adequate regulatory systems in many of our jurisdictions, proper enforcement of these remains a weakness in a number of jurisdictions. In some cases, the gap is even widening as new and additional rules continue to be promulgated, with uncertain effects on the efficiency and stability of insurance markets. Going back to the basics of implementing existing rule books may be the more appro­ priate route to go down for regulators.»

Michael S. Jensen, Managing Director MENA Zone, AIG

44 Survey Results – General insurance market status and outlook

Insurance penetration expected to increase

Over the next 12 months, 76% of the survey respondents expect insurance premiums in the MENA region to grow at a faster pace than regional GDP, up from 61% in 2016. This bullish assessment reflects the current momentum towards increasing rates and the continued growth in compulsory personal lines insurance (see chart 20). Offsetting factors cited by the less optimistic respondents include shrinking commercial insurance volumes, uncertainties surrounding disposable incomes as subsidies are being cut and taxes introduced, and a slowdown in expatriate recruitment.

Chart 20: Expected premium growth versus GDP growth

In line with GDP growth 16 %

Slower than GDP growth

Faster than 8 % GDP growth 76 %

«Many regulatory bodies in MENA fail to see the opportunities associated with banc­- assurance. A tie-up between a bank and an insurer can facilitate the provision of an exciting and sophisticated service that meets the needs of modern day consumers. Banks can bring a strong client base to the table whereas insurers know how to ‘manufacture’ products that appeal to different client segments. Both entities can jointly create a powerful sales forces on the premise of ‘insurance is sold, not bought’ and ultimately boost insurance penetration to their mutual benefit.»

Samir Sukkar, COO, Trust International Insurance

45 «The rise of modern technologies requires a major degree of vigilance, agility and adapt­ ability from MENA insurers. Digitisation has the potential for both disrupting and enabling existing insurance value chains. In order to be on the winner’s side insurers need to rethink their current business models and be prepared to make adjustments wherever needed.»

Constantinos Hadjigeorgiou, Group Corporate Services Officer, Trust Re

46 Survey Results – Lines of business-specific prospects

3. Lines of business-specific prospects

Personal lines continue to drive premium growth

As in previous years, medical insurance is expected to be the fastest-growing line of business in the MENA region over the next 12 months. Growth continues to be fuelled by compulsory insurance requirements, which for example, have made medical insurance the biggest line of business in Saudi Arabia. New compulsory regimes are also being implemented in other jurisdictions such as the UAE, with other GCC countries expected to follow suit. In addition, medical insurance rates have benefited from regulatory intervention such as mandatory actuarial pricing. In general, continued fiscal constraints are expected to afford private health insurers a structural boon.

Motor business continues to rank second, driven by rate increases, unabated cost inflation and a more stringent enforcement of third-party liability insurance. As in 2016, life insurance is the third most frequently mentioned line of business when it comes to short-term growth prospects, reflecting a growing awareness of the risks associated with premature death and critical illnesses in times of reduced government benefits. Further, bank loans are increasingly contingent upon mortality and disability protection. In addition, the issuance of public debt in a number of countries will favour life insurers in terms of access to long-term investment opportunities that match their liabilities profiles (see chart 21).

Chart 21: The fastest-growing lines of business (number of mentions)

Medical 35

Motor 31

Life 21

47 When the best isn’t good enough.

Hailing as one of the top 20 reinsurance brokerage companies in the world, Chedid Re is notably one of the most iconic amongst them. More than just a company, it is renowned for being a symbol of security, power and professionalism - leading key infrastructure projects across Europe, the Middle East and Africa. More than just a company, Chedid Re is an ideal strategic partner offering comprehensive insurance solutions that cater to the most intricate and delicate of needs. www.chedidre.com A company of Chedid Capital Holding Survey Results – Lines of business-specific prospects When

As far as the slowest-growing lines are concerned, the engineering and marine segments were mentioned most frequently, given their particular sensitivity to the economic cycle. The prospects for liability business are viewed less favourably than the best in the past as competition keeps heating up. Property, which used to rank among the slowest growing lines in previous years, no longer features on the list, reflecting a certain recovery of rates as discussed above (see charts 14 and 22).

Chart 22: The slowest-growing lines of business (number of mentions) isn’t good Engineering 26 Marine 22 enough. Liability 15

«One of the fundamental weaknesses «In Saudi Arabia the tightening of «In many MENA markets, especially our markets have to overcome is the regulation introduced by SAMA has in the Gulf region, life insurance way how repairs are handled in the contributed to a strengthening of the still plays a very marginal role, Motor line of business. We are in market, in particular in the motor accounting for less than 10% of total a very competitive market situation and medical lines of business. In premiums. This imbalance should be and cannot afford not to have fully the UAE we expect that the imple- addressed by the industry, not only optimized claims management mentation of regulatory changes through general awareness building processes. As an industry we will show a similar effect, possibly but also through innovative and have to implement the necessary leading to a rise in rates by 30% to appealing savings, critical illness processes and structures to improve 40% in motor – although claims are or pension products. Medium-term, the way how these costs are better expected to increase in tandem.» advanced data analytics are very contained.» likely to serve as a catalyst.» Hailing as one of the top 20 reinsurance brokerage companies in the world, Keith M. Byrne, Director, General Chedid Re is notably one of the most iconic amongst them. More than just a company, Frederik Bisbjerg, Executive Vice Insurance Operations, Tokio Marine Dr. Bassel Hindawi, Chairman/CEO, it is renowned for being a symbol of security, power and professionalism - leading President, MENA Retail, Qatar Middle East DIFC Insurance Association NPIO key infrastructure projects across Europe, the Middle East and Africa. More than just Insurance Company a company, Chedid Re is an ideal strategic partner offering comprehensive insurance solutions that cater to the most intricate and delicate of needs. www.chedidre.com A company of Chedid Capital Holding 49 Survey Results – Lines of business-specific prospects

As far as the most profitable lines of business are concerned, there is no change whatsoever compared to last year’s survey results. Over the next 12 months, the executives polled continue to expect marine to be the most profitable line of business, mainly owing to low loss ratios. Engineering ranks second, benefiting from relatively high barriers to entry and generally high and further improving standards of construction. Again, life insurance was identified as the third most profitable line. Group life insurance in particular is an attractive market segment for insurers who are able to offer bespoke and value-added solutions for corporate clients. In addition, according to some interviewees, the life insurance segment is relatively profitable as there is less competition than in most other lines (also as a result of relatively limited reinsurance capacity), the demographic profile is favourable and rates based on inter- nationally recognised mortality tables offer some cushion (see chart 23).

Chart 23: The most profitable lines of business (number of mentions)

Marine Cargo 28

Engineering 20

Life 15

50 Survey Results – Lines of business-specific prospects

As compared to 2016, medical and motor have swapped ranks as the least profitable areas over the next 12 months, with the former now in the top spot. Adverse loss trends and accelerating loss cost inflation for medical services are expected to continue. The same is true for motor insurance which, however, benefits from rising rates in a number of markets. Property continues to be viewed as the third least profitable line of business due to ample and inexpensive reinsurance capacity and a high degree of commoditisation. On a positive note, property rates have shown signs of recovery in some markets but doubts abound as to the sustainability of this trend (see chart 24).

Chart 24: The least profitable lines of business (number of mentions)

Medical 33

Motor 29

Property 24

«One common strategic response to «Whilst the aggregate state of «Increasing competitive pressures the unabated pressure on rates and insurance regulations in the MENA on a global scale have prompted profitability is increased diversifi- region remains rather inadequate, we some of the world’s largest insurers cation, both geographically and by are witnessing encouraging trends to scale back their presence in the line of business. This is one of the from a number of markets. There is Middle East. From an economic key drivers in the region as players clear progress towards introducing perspective, this trend implies a look for new markets to help grow solvency margins or even risk-based much greater scope for local risk and address unmet protection needs. solvency rules. These changes will go atomisation as the relevance of However, along with diversification a long way in enhancing the region’s global balance sheets reduces. It strategies, the market also needs insurance markets’ sophistication will put a premium on those local genuine innovation and to embrace and stability.» insurers who know how to manage technology which will support these large and complex commercial Yassir Albaharna, CEO, Arig new strategies, and progress on that risks.» front continues to remain fragmented Salvatore Orlando, Head of Middle and patchy.» East, Africa, Russia & Latin Mark Cooper, General Represen- America, PartnerRe tative Middle East, Lloyd’s

51 «We expect that the technical profitability for commercial non-life insurance will improve in the Gulf markets. The devastating claims experience from recent underwriting years plus the introduction of tighter and stronger regu­ lation in the UAE and in Saudi Arabia already left their positive mark in the recent renewals. The regulatory changes will bring greater underwriting discipline and financial stability to these insurance markets.»

Jasmine Miow, Senior Vice President, Peak Re

52 Survey Results – Key market trends and drivers

4. Key market trends and drivers

More favourable assessment of regulatory environment

The Pulse found that 43% of respondents believe the overall state of insurance regulation in the region to be adequate, up from 31% in 2016. This more positive assessment reflects progress towards introducing solvency margins or even risk-based solvency rules, especially in the UAE, in combination with a more rigorous enforcement of existing rules, following the example of the Saudi Arabian Monetary Authority (SAMA). However, some executives raised concerns over the capacity of the region’s regulatory authorities to implement new complex regimes, given the lack of qualified staff and a high reliance on external service providers. In addition, some interviewees felt that regulators have the wrong priorities. Rather than setting specific rules and adding ever more onerous and intrusive compliance requirements they should focus on a principles-based approach founded upon a risk-based capital regime. Other executives expressed concerns about the trend towards fixed tariff ranges which could impair innovation and exacerbate a major market weakness: the high degree of commoditisation. A number of executives also believe that regulators should entirely focus on protecting policyholders, rather than affording shareholders additional protection.

In general, the region remains highly heterogeneous as far as regulatory sophisti- cation is concerned, ranging from relatively effective and sophisticated regimes in Bahrain, Jordan, Morocco (coming close to Solvency II), Saudi Arabia and the UAE, to rudimentary and/or insufficiently enforced frameworks in parts of the Gulf region (see chart 25).

Chart 25: State of insurance regulations

Mixed 24 %

Adequate 43 %

Inadequate 33 %

53 Pearl Diving a brave diver and Seib looking after his safety

Seib Insurance and Reinsurance Company L.L.C.

The name of Seib Insurance and Reinsurance is derived from the old Qatari profession of Seib, who used to be a member of the pearl diving crew. His job was to hold one end of a rope, tied to the ankle of the diver collecting oysters from the seabed, waiting a signal to pull him up to safety. The word Seib denotes trust and credibility in protecting life and insuring security.

Builders of Trust. www.seibinsurance.com Authorized by the QFC Regulatory Authority Survey Results – Key market trends and drivers

Local talent situation remains challenging

70% of respondents believe that local technical skills are inadequate, up from 61% in the previous year. Most insurers continue to depend on expatriate staff, which is widely regarded as unsustainable. Insurers still do not adequately invest in the devel- opment of local talent, partly driven by a widespread ‘poaching’ culture in the market, coupled with employee opportunism. Talent shortages have been exacerbated by workforce localisation requirements.

In addition, some blame the industry’s overall poor public image for the failure to attract qualified local staff and to compete more effectively with governments and banks.

The state of local technical skills is another powerful illustration of the region’s diversity. Whereas the situation in Bahrain, Turkey, the Levant and some North African countries is judged relatively favourably, and improving in Saudi Arabia and Oman, the dearth of local talent remains acute in countries such as Kuwait, Qatar and the UAE (see chart 26).

Chart 26: State of local technical skills

Mixed 8 % Adequate 22 %

Inadequate

«For the upcoming twelve months we 70 % expect insurance premiums to clearly outgrow GDP in Morocco. Insurance penetration is still low, while our population is young and growing. In addition, disposable incomes are on the rise. All of these factors contribute to a positive outlook for insurance, in particular in personal lines.»

Fassi Fihri Youssef, CEO, Société Centrale de Réassurance (SCR)

55 «One of the biggest challenges facing medical insurers is the prevailing ‘fee for service’ model. There is little transparency with regards to and focus on quality and outcomes. This needs to change in order to put medical insurance on a sounder and truly sustainable footing.»

Christos Adamantiadis, CEO, Oman Insurance Company

56 Survey Results – Key market trends and drivers

Consolidation remains elusive

The survey found that only 33% – virtually unchanged from the previous year – of respondents expect market concentration to increase over the next 12 months. The relatively comfortable capitalisation of domestic companies in conjunction with family ownership continues to present major obstacles to mergers and acquisitions. However, going forward, it will become more difficult for domestic insurers to raise the additional capital potentially needed to meet new risk-based capital requirements. In addition, as reinsurers insist on higher retentions, an increasing number of shareholders is expected to withdraw from insurance companies (see chart 27).

Chart 27: Market structure outlook

Less con- centrated 5 % More concentrated 33 %

Stable 62 %

«For the sake of the insurance markets’ «Fierce competition in direct markets, long-term sustainability we need to fuelled by a surfeit of reinsurance capacity, have a consolidation of the supply side. is the defining feature of the MENA Longer-term, the current fragmentation insurance landscape. Some regulators would have highly detrimental effects. have realised that this state of affairs The banking industry might serve as an could ultimately jeopardize the long-term example. Here, a similar logic has recently sustainability and viability of the market led to major market-changing trans­ place at large and, accordingly, have actions.» embarked on corrective action. However, it will require a fundamental change of Dr. Abdul Zahra A. Ali, CEO, National behaviour among market participants to General Insurance Company ensure the regional insurance industry’s sound and long-term development.»

Mahomed Akoob, MD, Hannover ReTakaful

57 Survey Results – Key market trends and drivers

Foreign insurers expected to hold their own

The Pulse found that 60% – up from 47% – of respondents expect the market share of foreign primary insurers to remain stable over the next 12 months. The share of those anticipating a reduction in foreign market share has decreased slightly from 36% to 32%. Interviewees continue to mention some high-profile market exits and retrenchment programmes as a result of significant underwriting losses and a general market environment that is deemed less attractive. These moves are expected to favour domestic and regional market leaders. Also, some local insurers have stepped up their game, both in terms of underwriting capacity and expertise.

Having said this, foreign insurers expand their footprints in the life and medical segments of the market where they are able to offer seamless global service proposi- tions to their multinational clients and trusted brands to expatriates (see chart 28).

Chart 28: Outlook for foreign market share

Higher 8 % Lower 32 %

Stable 60 % «Oman boasts very favourable funda- mentals which underpin its insurance market’s relative strengths. Governance standards are at par with international best practice – which affords comfort not least to international reinsurers dealing «Yemen’s insurance market offers a huge with domestic cedants. Growing per potential as soon as peace and stability capita income levels drive the continued have returned to the country. Yemen expansion of retail insurance lines. exhibits highly favourable demographics, And, last but not least, very high safety a robustly diversified economy as well as standards benefit the construction sector abundant natural resources such as oil and and its (re)insurers. Having said this, as gas. Reconstruction needs are enormous, other markets in the region, Oman has as are the associated commercial to contend with a high dependency on insurance requirements.» oil price developments as well as excess Tarek A. Hayel Saeed, GM & MD, United capacity resulting from a fragmented Insurance Company market structure.» P.R. Ramakrishnan, CEO, Vision Insurance

58 Survey Results – Key market trends and drivers

Brokers maintain their dominant position

As in 2016, intermediaries are expected to be the fastest-growing distribution channel over the next 12 months. In addition to their natural relevance in a price-driven market brokers are believed to benefit from the growing complexity of cover and increasing need for expert advice and support (e.g. in claims settlement) going beyond a purely transactional role.

Banks continue to rank second, with a specific advantage in distributing life insurance policies. A growing number of banks are starting to understand the potential of insurance sales as another contributor to overall profitability. They take advantage of the fact that their client relationships tend to be stronger than those of insurers. The latter are more interested in tying up with banks in order to bring down the cost of distribution and improve their operating efficiency.

Online is the third most frequently mentioned distribution channel. It is believed to have significant potential in retail business given the region’s young and internet-savvy population. In addition, its benefits are increasingly being recognised by insurers that operate at marginal levels of profitability. However, the loyalty to traditional channels of distribution is deemed high in the region which slows the advance of digital insurance (see chart 29).

Chart 29: Fastest-growing distribution channels (number of mentions)

Brokers 25

Banks 19

Online 16

«Most insurers in the region still compete «Insurers and their intermediaries should on price only. This behaviour does not realise that ultimately they all have to only destabilise the market but also work towards a common goal – promoting ignores the major commercial potential customer awareness and trust. One single from offering superior quality service and individual misstep on any echelon of reliability. Don’t underestimate customers’ the corporate hierarchy, from corporate willingness to pay a higher price for a more governance to sales and operations, can appealing insurance product.» set back the entire industry by damaging its collective reputation. Against this Ahmad Idris, CEO, Abu Dhabi National backdrop, the case for living up to the Insurance Company highest possible standards goes far beyond individual corporate bottom-lines.»

Fareed Lutfi, Secretary General, Emirates Insurance Association & Gulf Insurance Federation

59 «As opposed to other sectors of the economy the insurance industry receives relatively little attention from governments in the Middle East. This is a real shame given the growing economic and societal importance of insurance. Due to fiscal constraints, risk transfer will increasingly have to be provided by private sector insurers. In addition, the industry will have to play a pivotal role in accompanying economic policies aimed at diversifying away from oil and gas revenues. Last but not least, insurers will be vital to facilitating deeper and broader domestic capital markets, also in light of increased levels of sovereign debt issuance.»

Farid Chedid, Chairman & CEO, Chedid Capital and CEO, SEIB Insurance & Reinsurance

60 Survey Results – Key market trends and drivers

Views on Takaful remain subdued

32% of respondents – virtually unchanged from the previous year – expect Takaful insurance to underperform the market as a whole in terms of growth. At 19%, the share of those expecting it to outperform has decreased slightly.

Many executives continue to feel that Takaful offers no genuine differentiation and does not even live up to the concept of mutuality, given conflicting interests of policy- holders and shareholders. This lack of a ‘Unique Selling Proposition’ forces many Takaful insurers to engage in fierce price competition.

Going forward, some interviewees suggest that Takaful players should concentrate on embracing the concept of mutuality which works best in personal lines such as motor and medical insurance where portfolios are relatively homogenous. The biggest potential is seen in Family Takaful, i.e. life insurance and savings products (see chart 30).

Chart 30: Growth prospects for Takaful insurance

Faster than total market Slower than total market 19 % 32 %

In line 49 %

61

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